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Wow, my field of study finally comes in handy. I can tell you that the tendancy to shorten words to make them seem more familiar is extremely common. Fraternity is a Latin/Greek root, and English speakers find words of that sort to be difficult to pronounce and generally intimidating. We try to shorten them, make them sound more Anglo-Saxon. There are virtually no native English root words with more than two syllables, and most have just one. We're linguistically uncomfortable with words of this length. Also, the two unvoiced dentals (the t's) pose a problem- English speakers try to change t's and d's in the middle of words into what are called dental flaps- it's the sound most people make when they say butter, not quite a t or a d. You can't do that with fraternity. So it gets cut down to frat. (And I just proved my education hasn't been a complete waste- if only my parents were here to see it.)
On my personal opinion of people using it, I can say it certainly raises my hackles, and I forcefully correct the person. I'm in a fraternity, not a frat, although I could point you towards some frats if you like. It reminds me of that Chris Rock bit- "I love black people, but I hate n****s."
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